BoT and BoP Deficits : Some Thoughts

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BoT and BoP Deficits : Some Thoughts

Careful formulation of policies and patience in implementation are important to ease the problems in the country’s external sector.
 
--BY SHASHI RANJAN KALWAR
 
Nepal’s trade deficit surged by 87.44 per cent during the first five months of the current fiscal year 2075-2076 (2018-2019) compared to the same period the previous fiscal year. Such deficit widened to a whopping Rs 277.13 billion in the review period, as against Rs 140.03 billion in the same period a year ago, as the macroeconomic report of the Nepal Rastra Bank shows. The widening trade deficit has been a matter of serious concern for Nepal as it is continuously rising year after year. 
 
Official statistics show Nepal’s trade dependence on India has increased in recent days. Nepal imported goods worth Rs 195.15 billion from India, more than double of last year’s figure.  Sluggish industrial activities are the disturbing features of Nepal’s economy. The manufacturing sector’s contribution to the country’s GDP has declined to a mere five percent from around 14 percent in 2000. As a result, imports have swelled and dependency on imports has been accepted as the main reason behind the widening trade deficit. 
 
The lack of proper infrastructure and geographic constraints have also led to Nepal’s chronic trade deficits. Nepal mainly exports iron and steel products, carpets, textiles, plastics, hollow tubes, beverages and vegetables. Nepal mainly imports oil, gold, iron and steel, clothes, pharmaceutical products, cement, electronic appliances, food and vehicles.
 
A lot can be done to tackle the growing trade deficit but we need patience and planning.
 
1. Enhance Production Capacity
Our Industrial output has been quite low as compared to other underdeveloped and developing countries. Nepal has not been able to produce and export enough goods to fully pay for imports. We are highly dependent on imports for our needs and even though everyone has been talking about consuming local goods, the situation is opposite. 
 
In the past few years, we have seen a few sectors grow and increase production. For example, the domestic cement industry has been increasing its capacity following Foreign Direct Investment by some reputed companies. Chinese investors Huaxin Central Asia Investment (Wuhan) Co Ltd, will operate Huaxin Cement Narayani Pvt Ltd, at Talti in Mahadevsthan area of Dhading district sometime soon. Likewise, Hongshi Holdings with its local partner Shivam Cements has increased production capacity at its cement plant in Nawalparasi. Moreover, African conglomerate, Dangote has announced to invest Rs 55 billion in a cement plant to be built in Nepal. 
 
According to Cement Manufacturers’ Association of Nepal, there are more than 40 (mainly mini) cement plants in the country and domestic production accounts for 85% of domestic consumption which is a positive sign for the country. It is also estimated that the annual gross consumption of cement in Nepal at present is around 2,500,000 MT. Annual increment of demand for cement in Nepal is considered to be around 20 percent.
 
Moreover, if local cement manufacturers increase their capacity, no doubt the imports of cement will come to a halt which will directly reduce the country’s trade deficit. Likewise, many companies are working towards the export of cement to neighboring countries which is a positive sign. This is because of their enhanced production capacity. 
 
Further, if we look at electricity production, Nepal is moving ahead neck and neck with what is required for domestic consumption. In a couple of years, the country will be self-sufficient in electricity and soon after that Nepal will be well in a position to export power which will also directly reduce imports and thus BoT and BoP deficits. 
 
Likewise, if we look at the medical sector, our country already has more than 75 drug manufacturing companies. Still we are far from being self-sufficient in drugs. It is estimated that the total domestic market of medicines in Nepal is worth Rs 70 billion (including raw materials and surgical products) of which around Rs 45 billion is imported.   
 
Moreover, we have many such products like lubricants, agriculture produce, paints and adhesives, textiles, beverages (alcoholic and non-alcoholic) etc, where we can enhance our production capacity to displace imports.
 
 
2. Lower Local Taxes
Higher rate of taxes is one of the major hurdles to the development of the industrial sector and consumption in Nepal. Be it the excise duty or the Value Added Tax or the Corporate Income Tax, high rates have been affecting the local consumption demand. The dependency on foreign goods has been high due to the high tax structures in the country. The production cost is low in other countries. This makes their products cheaper and encourages import of foreign goods to meet the domestic demand. The government should evaluate if its current expenditure is met through the local duties (excluding import tax). If yes, then all the tax slabs can be removed and a single rate of five percent can be fixed on all goods produced in the country. An example of ‘One Nation One Tax’, stands right beside us with the Indian government introducing GST on their produces. This tax structure will definitely increase the tax collection and will curb illegal transaction. This will also help increase the consumption of the local products due to the lowering of cost. Similarly, the corporate taxes, too, should be restructured. For example, the commercial banks and financial institutions pay 35 percent tax on their entire earnings which is unjustified.
 
3. Use Electricity As A Resource
Nepal has a huge potential in generating electricity, not only hydroelectricity but also wind and solar energy. We have been time and again told that our county has the capacity to generate around 83,000 MW of hydroelectricity and more than 3,000 MW of wind energy, but not much has been done in these respects. We can see some development in hydroelectricity generation but almost nothing in other forms of clean energy. If we have a surplus of electricity and sell it, that will have a huge impact on our balance of payment (BoP) as well as balance of trade (BoT). No doubt, our country stands to gain a lot from the generation of surplus electricity. 
 
If we can use electricity for cooking, it will reduce the import of cooking gas. The country imported around 370,560 metric tonnes of LPG and around 22,311 Kiloliter of kerosene in fiscal year 2074-75 (2017-2018). Now if we use electricity as a source of cooking then we can definitely save a huge amount of money every year which will have a great impact on our BoT as well as BoP. 
 
With the round-the-clock supply of electricity, Nepal can drastically reduce the import of inverters, batteries, generators etc. This will also reduce our import cost.
 
We can run electrical vehicles if we have enough electricity and infrastructure. That in turn can reduce the import of petroleum products drastically. Likewise, with electricity surplus, the import of coal, too, will go down. These steps will help in checking pollution. 
 
Round-the-clock electricity supply at reasonable rate will reduce the current cost of production of the domestic industries. That will make domestic goods cheaper than imported goods. 
 
With one source, we can develop many other sources. 
 
(The author is Managing Director of Birgunj-based Ranjan Enterprises Pvt Ltd)
 

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